Selling put options offers several benefits to the seller. One benefit is the ability to generate income on your portfolio. If the sold put expires without exercise, the seller keeps the entire premium. Another key benefit is the ability to own the underlying stock for a price below the current market price. Since selling a put places you in an obligatory position of taking ownership of a stock, the most important rule of put selling is consider only selling a put if you are comfortable owning the security at the predetermined price, should it indeed be put to you. Otherwise, buy to close the put if it falls below the strike price.
The safer play is to sell puts on a stock that has upward momentum without any close resistance at its current price level. Two potential stocks worth looking to sell puts for income include Nike (NKE) and Starbucks (SBUX).
Nike sprinted higher on Dec. 21, as Wall Street applauded stronger than expected quarterly profit and revenue figures. The post-earnings rally simply continued a longer-term uptrend for NKE, which has been climbing consistently higher since March 2009. On a year-to-date basis, the stock has added 11%, easily besting the performance of the major equity indexes. Now that the January 2012 series has assumed front-month status, NKE stands to benefit from options-related tailwinds. The shares are trading north of peak put open interest at the January 90 strike, which carries upwards of 6,000 contracts in residence. As expiration approaches, an unwinding of these out-of-the-money puts could reinforce existing round-number support, pushing NKE higher.
Recommendation: NKE is trading around $98 per share. Sell the February 18, 2012 95-strike put. Buy the option back if NKE falls to $95.00 if you don’t want to own the stock.
Starbucks has been on a technical tear in 2011, with the shares cruising to a string of new all-time highs. The stock briefly encountered resistance in the $44-$44.50 region during the early weeks of December, but a broad-market bounce on Dec. 20 pushed SBUX through this temporary technical hurdle. Already, this former ceiling appears to be switching roles to act as a support. Meanwhile, on the sentiment front, puts remain the options of choice on SBUX. The equity’s SOIR of 2.01 highlights a preference for puts over calls among short-term speculators, and arrives in the skeptically slanted 82nd percentile of its annual range. Going forward, this glut of put open interest could translate into an additional layer of structural support for SBUX.
Recommendation: SBUX is trading at $46 per share. Sell the February 18, 2012 43-strike put. Buy the option back if SBUX falls to $43.00 if you don’t want to own the stock.